Flagstar annual income triples, even though mortgage business was "softer than we expected”

Lending

Flagstar Bancorp recently posted both its fourth quarter and full year earnings and it’s quite the read.

First, the good news: Full year 2018 net income was $187 million, as compared to full year 2017 net income of $63 million. Yes, that’s nearly triple the profit after taxes and other deductions are taken out. The bank also reported fourth-quarter net income of $54 million, after reporting a loss in the same period a year earlier.

But how? Aren’t most lenders shrinking or being acquired?

[Watch this related video: Why Movement CEO Casey Crawford says 2019 will see “a lot of disruption, a lot of consolidation” in mortgage lending.]

Flagstar cites three primary reasons for its unique position of strength:

  1. The purchase of branches from Wells Fargo in the Midwest
  2. Strong capital position with total risk-based capital ratio at 13.6%
  3. Pristine asset quality with minimal net charge-offs, low consumer delinquencies and no commercial delinquencies

“Our banking and mortgage servicing businesses had another good quarter. Deposit costs were relatively unchanged, despite the increase in short-term rates at the end of the third quarter. The adjusted net interest margin expanded 6 basis points to 2.99%. Total serviced accounts increased a remarkable 34% to nearly 827,000, further growing an important source of fee income and liquidity,” said Alessandro DiNello, president and CEO of Flagstar Bancorp.

However, DiNello adds that: “Our mortgage business was softer than we expected.”

“We remain focused on reinforcing mortgage profitability, and believe we can use our market position and scale to succeed in a mortgage market with fewer players,” he said.

So how can DiNello be so sure of success in a shrinking mortgage market, especially since mortgage lending is slowing at his operations as well?

According to the filing, Flagstar believes it is well positioned, in part, because of its recent acquisitions of bank branches from Wells Fargo in the Midwest. In the filing, the vast majority of Wells customers stayed with Flagstar. Though DiNello admits it took some work, the transition team beat his expectations, and then some.

“I’m proud of how the team reacted to this challenge. Although the deposits we purchased at acquisition were lower than anticipated, at this point, nearly 2 months after the conversion, we’ve seen only 8.7% attrition (as of January 19) as compared to the 17% post-closing attrition we had projected. We remain confident in the benefits of the acquisition, which boosts our net interest margin and provides substantial, low-cost stable liquidity.”

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